ACCOUNTING CONCEPTS,

CONVENTIONS AND PRINCIPLES

Dr. Ambedkar Institute of

Management Science and Research,
Nagpur
Aim and objectives the presentation
At the end of the sessions, the participants should be able
to:
To understand accounting and reporting policies.
To define accounting concepts and convention.
To explain factors to be considered in selecting an appropriate
accounting policies.
To examine changes in accounting policies.
To state the disclosure requirement of accounting policies.
To discuss the impact of accounting policies on the recognition of asset
and liability..
Then what will be your impression
about the accounting profession.
To avoid this kind of situations. We
need to know why things are like that
in accounting.
Various rules or accepted ways of
going about thing have evolved in
accounting profession. These things
are like rules of the game and are
known as “Concept sand Conventions
Accounting and reporting policies
Reporting policies consists of the inter play of the
following:
• Accounting policies
• Accounting concepts
• Accounting methods
• Accounting bases
• Accounting assumptions
• Accounting conventions
• •These terms are what are referred to as
accounting concepts and convention.
Accounting policies

• Accounting policy of a giving company is simply

means all those specific accounting concepts,
accounting methods and accounting bases which
are adopted by the entity in the presentation of
its financial statements.
Accounting policies
• A complete set of financial statements comprises
according to IFRS is the following:
• ■Statement of Financial Position(formerly Balance Sheet);
• ■Statement of Comprehensive Income (formerly Income
Statement);
• ■Statement of changes in equity;
• ■Statement of cash flows;
• ■Notes to the financial statements that contain accounting
policies and other explanatory-information ; and
• ■Statement of financial position for the beginning of the earliest
comparative period when an entity applies an accounting policy
retrospectively, makes a retrospective re statement of item in its
financial statements.
Accounting concepts
• Accounting concepts are defined as those fundamental
assumptions or postulates that underlie the preparation and
presentation of financial statements.
They are as follows:
• Going concern concept
• Legal entity concept
• Periodicity concept
• Realization concept
• Matching/Accrual concept
• Historical cost concept
• Consistency concept
• Dual concept
• Monetary measurement concept (quantitative)
Going concern concepts

• Itstatesthatacompanywouldoperate(neverdieorst
op)foraforeseeablelongfuture.
• Inthisconcept,itisassumedthatthebusinesswill
continuetobeinoperationforanindefiniteperiodof
time.Ifthebusinessweregoingtobesold,thenitwoul
dbenecessarytoknowhowmuchtheassetswillfetch
.
Legal/Business entity concept

• It states that a modern business is always separate,

distinct and independent of its
owners/shareholders/managers/directors.
• This concept state that a business is an entity
(perceived to have its own existence)separate from it
owner. Therefore business record should be
separated and kept distinct from the personal record
of the business owner At time law makes the same
distinction, as in the case of limited company which
is a separate legal entity from the shareholders or its
Directors
Periodicity concept

• It states that in every financial accounting records kept and

prepared, there must have a time for its reporting. The time
accepted for the report is the period of 12 months.
• The results of the business must be prepared in interval
not to be allowed until its final liquidation. That is why
business is divided into accounting period
Realization concept

• It states that rule for recognizing the revenue of the

business.
• Periodic recognition of revenue is made as soon
as: it is capable of objective measurement and the
value of assets received or receivable in the
exchange is reasonably certain.
• In accounting; profit is normally regarded as
being earned at the time when the goods or services
are passed to the customers and he incurs liabilities
for them
MONEY MEASUREMENT

THIS CONCEPT EMPHASISES THAT

WHATEVER IS RECORDED IN ACCOUNTS
BOOK SHOULD BE MEASURABLE IN
MONETARY TERMS,.
Realization concept

• Revenue is recognized at a variety of time but

four(4)instances are prominent which are:
• 1.At the time of sale of asset
• 2.During production of asset
• 3.At the completion of the production of asset
• 4.At a point of cash collection.
• The choice of the time usually is more of
industrial norms.
THE HISTORICAL COST CONCEPT

• It states that the purchasing price as a cost of an

asset/liability is the appropriate basis for the
initial accounting recognition of an asset
acquired; services rendered; expenses incurred;
creditors and owners interest. It should be
retained throughout accounting process.
THE HISTORICAL COST CONCEPT

▫ This requires that asset of business be

recorded in the ledger account at
the actual price paid to acquire them.
This means asset be recorded at their
original price of acquiring them. This
cost serves the basis for further accounting
treatment of the asset.
THE DUAL ASPECT CONCEPT

This concept states that each and every

transaction will have two or dual aspect.
For e.g. cash invested in business Rs. 10000
Cash = Capital
10000=10000
THE ACCRUAL/MATCHING CONCEPT

• It states that the profit of the business should be

recorded at a point of sale irrespective of
whether cash is due or in arrears as the expenses
related to is simultaneously recognized when
incurred not necessarily when cash is paid.
• The principle states that the income and cost
accruing to the owner of a business is not
necessarily the amount of cash actually received
in a period of account. That is revenue and costs
are recorded when they occur rather than when
the cash is received or paid.
Accounting Methods

• They are ways or media through which at he

accounting concepts a reapplied in the preparation
and presentation of financial statement.
• Examples are:
• 1.Straightline/reducing methods of depreciating
assets.
• 2.Closing rate/temporal method for translating.
• 3.Completed contract methods or percentage of
completion method and so on.
Accounting Bases

• Generally, accounting methods are grouped

into:
• Cash Basis: states that all business
transactions are recognized only when the actual
cash is paid or received by the entity.
• Accrual Basis: states that all business
transactions are recognized whether the cash has
been received or not
Contents of accounting policy
• Items to be included in the accounting policies of a given
company are:
• 1.General accounting policies
• 2.Policies on measuring fixed assets
• 3.Policies on stock or work in progress valuation
• 4.Policies of depreciating assets and depreciation methods
• 5.Policies on investment
• 6.Policies on lease
• 7.Policies on research and development
• 8.Policies on franchises
• 9.Policies on employee retirement methods
• 10.Policies on consolidation etc.
Accounting Assumptions

• Thesearethebeliefsofwhichpreparationandpresentati
onoffinancialstatementisbuiltupon.
• Inaccounting,therearetwoassumptions:
• Stability:abeliefthatthemonetaryunitswhichistheb
asisofvaluationandmeasurementofalltransactionrem
ainthesameoveraforeseeablefutureperiodoftme.
• continuity:Agoingconcernwhichsharethebeliefthat
thebusinessentitywillsurviveandcontinueoperationi
naforeseeablefuture
THE ACCOUNTING CONVENTIONS

• Theaccountingconventionscanbeinterpretedinmany
ways.Whatwerethereforegrownupinaccountingarege
nerallyacceptedapproachestotheapplicationofthecon
cepts.Theseapproachesareknownastheconventionsof
accounting(Regulation).Themainconventionsare:-
• -Materiality
• -Conservatism/prudence
• -Consistency
• -objectivity
MATERIALITYCONVENTION

• Itstatesthatafinancialstatementshouldpresentan
dreportallitemsoftransactionwhicharecapableofi
nfluencingthedecisionofstakeholdersndifsuchite
msomissioncompletelyorwronglystatedwouldsig
nificantlyalterthestakeholders’decision.
• Thisisaconventionthatrecordsanythingthataresig
nificantenoughtojustifytheusefulnessoftheinfor
mation.Onlyitemsthataredeemedsignificantforag
ivensizeofoperationshouldberecorded.Accounta
ntsareguidedtoignoreinsignificantdetailsotherwi
setheaccountwillbeburdeneddownwithminutede
tails.Thereforematerialityisanissuerofjudgment.
CONSERVATISM/PRUDENCE
CONVENTION

• Itstatesthatafinancialstatementsreportandrecog
nizeinstantlyandadequatelyknownlosesandgains
/profitisignoreduntilitsfullrealizationiscertain.
• Veryoftenanaccountanthastomakeachoiceasto
whichfigurehewilltakeforagivenitem.
• Conservatismmeansthattheaccountantwilltaketh
efigure,whichwillunderstateratherthanoverstatet
heprofit.Allanticipatedlossesshouldberecordedb
utallanticipatedgainsshouldbeignored.
• Thereforeprovisionsismadeforalllosseseventho
ughtheamountcannotbedeterminedwithcertainty
.
CONSISTENCY CONVENTION

• Itstatesthatthefinancialstatementsshouldbeprep
aredinawaythatasimilaritemsoftransactionsaretr
eatedequallyandsimilarlysoastomaintinuniform
presentationformatadoptableoveratime.
• Theconceptandconventionalreadylistedaresob
roadthatinfacttherearemanydifferentwaysinwhic
hitemsmayberecordedintheaccounts.
• Bythisassumption,accountantsareexpectedtorec
ordandreportaccountingactivitiesinthesamewayy
earbyyearifanysensibleandmeaningfulcompariso
nwouldbemadtofinancialreportofafirmfordiffere
ntperiods.Havingaparticularmethodwouldgiveth
efirmthemostequitablepictureoftheactivitiesofth
ebusiness.
OBJECTIVITY CONVENTION

• Itstatesthatpreparationandpresentationoffinanci
alstatementsshouldbemadefreefromtheaccounta
nts/preparersbias,undueinfluenceandconflictofi
nterest.
• Allitemsoftransactionsreportedaresupportedb
ythedocumentaryevidenceandfacts..
Factors to Consider when Choosing
Accounting policies
• Some concepts , methods and bases conflict with one
another. Thus, judgment is required to select the good
relevant policies for your financial statement so as to
ensure true and fair view of the reporting. These factors
are as follows:
• Fairness
• Materiality
• Substance over form
• Objectivity
• prudence

• By
Disclosure Requirement of
Accounting policies
• IFRS-IAS/SAS1states that all accounting policies
of a reported entity should be disclosed together
under one caption rather than as note the
individual items in the financial statement.
Changes in the Accounting Policies

• Consistencyisrequiredtobeappliedinfinancialrep
orting,yet,instancesmaywarrantchangesofaccoun
tingpolicies.
• Thecircumstancesgivingrisetochangesare:
• Wheretheexistingpoliciesnolongerensuretruea
ndfairviewoftheevent.
• Wherethereisanewaccountingstandardthatren
derstheexistingpoliciesinvalid.
• Wherethereinnewlegislation/regulationthatwo
uldensureabetterpresentationoftrueandfairviewo
ftheaccount
ACCOUNTING PRINCIPLES
• Accounting is guided by the following principles:
• Substance over form
• Objectivity
• Fairness
• Materiality
• Prudence
• Substance over form: states that substance/uses/economic
reality of an item of transaction is always reported at the
expense of legal form.
• Fairness: states that all stake holders of accounting are
treated with equally without favoring a group at the expense
of another.
• Assets and Liabilities are subject to or exposed
to these methods of valuation as proposed by
accounting policies.
• The methods include:
• Historical cost methods
• Realization value methods
• Current value methods
• Replacement cost methods
Impact of Accounting Policies on the
recognition/measurements of Assets
and Liability

• The value of assets and liabilities to be disclosed

in the financial statements are greatly affected
by the policies adopted.
• Realization value method value assets and liability
based on what the assets/liabilities could fetch at
the point of disposal after removing disposal
expenses.
• Current value method value assets/liability
basedonwhatanewbrandoneisbeingsoldinthemarket
atanarmlengthtransaction.Itiscalledfairvalue.
• Replacement cost method value assets/liability
based on what new but similar one would cost in the
open market if acquired to replace the existing
asset/liability.
ACCOUNTING BOOKS
• There are various forms of accounting books
depending on what the book is used for. The
main books of accounting and financial
statement known are:
• a)Cash register
• b)Cash book
• c)Petty cash book
• d)General ledger
• e)Trading, profit and loss account
• f) Trial balance
• g) Balance sheet
• h) Bank reconciliation statement
• The following are the subsidiary books of
account:
• a)Purchases day book
• b)Sales day book
• c)Purchases return day book
• d)Sales return day book
•THANK YOU
FOR YOUR
PRESENCE